<p>Traditionally considered a memory structure, the hippocampus may contribute to visual perception in fundamental ways. Recent evidence suggests that the ability to differentiate highly confusable unfamiliar faces could involve pattern separation, a mnemonic process mediated by the hippocampal dentate gyrus. Hippocampal involvement, however, may be influenced by existing face memories. We tested BL, an individual with rare selective bilateral dentate gyrus lesions accompanied by compromised pattern separation, and 34 control participants to investigate these possibilities. Participants were administered morphed images of nonfamous and famous faces in a standard categorical perception (CP) identification and discrimination experiment, with nonfamous faces especially high in perceptual overlap without the influence of prior knowledge. All participants, including BL, exhibited nonlinear identification of famous faces with a midpoint category boundary. Controls identified newly learned nonfamous faces with lower fidelity and a midpoint category boundary, whereas BL showed a shift in category boundary. When discriminating face pairs, controls showed typical CP effects of better between-category than within-category discrimination—but only for famous faces. BL showed extreme within-category “compression” for both nonfamous and famous faces, reflecting his tendency to pattern complete following suboptimal pattern separation. By using standard tests of CP, we show that the dentate gyrus, by virtue and extent of its pattern separation function, contributes to the CP of faces. This study provides an essential missing link in understanding the perceptual processes and interactions with prior knowledge involved in face processing by the dentate gyrus.</p>